Credit union pilots cheaper “payday” loans – Credit Today

A pilot payday loan product offered by London Mutual Credit Union (LMCU) over 12 months found that borrowers were encouraged to spread repayments more affordably over a longer period.

The pilot short-term loan offered by LMCU received 6,087 applications, asking for an average loan amount of £238.

The scheme, which was funded by charity Friends Provident Foundation and the Barclays Community Finance Fund and produced by research firm the Financial Inclusion Centre, distributed a total of 2,923 loans short-term loans with a value of £687,757 over the course of a year to 1,219 different borrowers.

The results showed that 59% of applicants chose to repay their loan over three months, while 29% asked to repay in one month.

Some 331 new members went onto place a combined total of £18,000 in savings accounts with the credit union, while 27% took a longer term loan with LMCU, rising to 40% after six months’ membership and 52% after nine months with the credit union.

The scheme claimed that by borrowing through the credit union instead of a high-cost payday lender, 1,219 people collectively saved some £145,000 in interest charges, equivalent to almost £119 per borrower.

Lucky Chandrasekera, chief executive of London Mutual Credit Union, said: “An increase in the use of payday loans by those already in debt, as well as the growing number of our own members turning to this form of short-term credit, persuaded us to develop an affordable alternative.

“Following the success of the pilot, we plan to roll out the service to many more potential customers.”

When surveyed, 66% of applicants said the low cost compared to other payday lenders was their main reason for borrowing through LMCU, while 19% liked the fact it was a credit union and 10% favoured the longer repayment option.

Before accessing their first LMCU loan, 74% of the borrowers surveyed had taken an average of 3.2 loans in the previous 12 months, while 17% had taken out six or more loans.

Andrew Thompson, grants manager at Friends Provident Foundation, said: “We are delighted by the success of the pilot scheme, which demonstrates that it is financially viable for this kind of responsible, affordable lending to be delivered by not-for-profit, member-owned-and-run providers.

“The model seems to have great potential for wider roll out and we look forward to seeing if credit unions across the country can find a way to offer a similar service.”